Nuveen Churchill Direct Lending Corp. quarterly report, Q2 FY2022

Nuveen Churchill Direct Lending Corp. — Form 10-Q Summary

Business context and reporting period

Unaudited quarterly report for the period ended June 30, 2022. The Company is an externally managed, non-diversified business development company and regulated investment company focused primarily on senior secured and unitranche loans to private-equity-owned U.S. middle-market companies. Its portfolio included 121 companies at quarter-end, compared with 74 at June 30, 2021.

Key financial metrics

Metric	Three months ended June 30, 2022	Six months ended June 30, 2022
Total investment income	$16.5 million	$30.6 million
Net investment income	$9.7 million	$18.8 million
Net realized gain on investments	$56 thousand	$92 thousand
Net unrealized depreciation	$(12.5) million	$(14.9) million
Net increase in net assets from operations	$(2.7) million	$4.0 million
Net investment income per share	$0.44	$0.88
Net asset value per share	Not separately presented for the quarter	$18.76 at June 30, 2022

Net assets were $425.8 million at June 30, 2022, versus $374.1 million at December 31, 2021. Shares outstanding increased to 22.7 million from 19.3 million.
Investments at fair value totaled $977.7 million, consisting primarily of first-lien term loans of $864.9 million, subordinated debt of $101.7 million and equity investments of $11.1 million.
Portfolio weighted-average yield was 8.04% at fair value and 7.91% at cost, compared with 6.71% and 6.72%, respectively, at December 31, 2021. Approximately 95.63% of debt investments bore floating rates.
Cash and cash equivalents were $33.0 million, including restricted cash. The Company reported $365.6 million of available borrowing capacity and $469.8 million of undrawn shareholder capital commitments.
Secured borrowings were $581.8 million net of deferred financing costs; gross outstanding secured debt was approximately $587.6 million. Asset coverage was 172.5%, compared with 191.2% at December 31, 2021, versus the required minimum of 150%.
Operating cash flow was $(226.9) million for the six months, primarily reflecting $248.0 million of investment purchases. Financing activities provided $224.7 million, including $65.0 million from share issuances and $544.6 million of borrowing proceeds, partly offset by $367.0 million of debt repayments.
The Company declared a $0.43 per-share dividend for the June 30, 2022 record date, compared with $0.41 for the March 31, 2022 record date.

Material changes versus comparable periods

Six-month investment income increased to $30.6 million from $13.8 million, and net investment income increased to $18.8 million from $6.7 million, principally due to substantially greater investment activity and portfolio growth.
Net expenses before expense support increased to $11.9 million from $7.4 million. Interest and debt financing expenses rose to $7.3 million from $4.5 million, while management fees rose to $3.3 million from $1.6 million.
Unrealized investment performance reversed from $2.5 million of appreciation in the prior-year six-month period to $14.9 million of depreciation. Management attributed the decline primarily to macroeconomic and geopolitical uncertainty and widening credit spreads.
Investment purchases increased to $248.0 million from $212.7 million, while proceeds from principal repayments and sales declined to $29.7 million from $48.9 million.
The portfolio expanded materially, with fair value increasing from $773.0 million at December 31, 2021 to $977.7 million at June 30, 2022. Business Services remained the largest industry exposure at 22.0% of portfolio fair value, followed by High Tech Industries at 9.0% and Healthcare and Pharmaceuticals at 8.3%.
On May 20, 2022, the Company completed a $448.3 million term debt securitization through CLO-I. Consolidated CLO-I debt outstanding was $342.0 million at quarter-end, with notes due in 2034.

Guidance, outlook, risks and unusual items

No formal earnings or distribution guidance was provided. Management expects investment income to grow as the Company draws its remaining capital commitments and continues investing, but noted that investment activity may vary with credit-market conditions, inflation, interest rates, geopolitical events and recession risk.
Management is monitoring COVID-19 effects, supply-chain disruptions, labor shortages, inflation, rising interest rates, the Russia-Ukraine conflict and related market volatility. These factors could affect portfolio-company performance, investment valuations, liquidity and cash flows.
Approximately 89.6% of the portfolio was rated Internal Risk Rating 4, while 9.3% was rated 5 or 6. No investments were rated 7 through 10, and no loans were on non-accrual status at June 30, 2022.
Unfunded delayed-draw loan commitments totaled $136.9 million. The Company stated that available assets and financing sources were sufficient to cover these commitments, but actual funding requirements could increase.
Most investments were valued using Level 3 inputs, making NAV sensitive to assumptions regarding discount rates, borrower performance and comparable-company multiples. Level 3 assets totaled $950.8 million.
The CLO-I securitization introduces structural and liquidity risks. The Company’s retained CLO-I notes and membership interests are junior to other secured notes, and cash distributions could be diverted to senior noteholders if coverage or interest tests are not satisfied.
The Company had $2.8 million of unreimbursed expense payments due to the Adviser under the Expense Support Agreement, subject to reimbursement conditions. The Company was not entitled to incentive fees at quarter-end.
Subsequent to quarter-end, the Company issued 2,652,775 shares for approximately $50 million on August 1, 2022.
Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material legal proceedings were reported.

Important facts for investors to verify

Reconcile consolidated secured borrowings of $581.8 million net with gross debt of approximately $587.6 million and confirm the treatment of CLO-I debt.
Review the valuation methodology and sensitivity of the predominantly Level 3 portfolio to wider credit spreads, higher discount rates and weaker borrower performance.
Assess whether the $136.9 million of unfunded investment commitments, $469.8 million of undrawn shareholder commitments and available credit facilities provide adequate liquidity under stressed conditions.
Monitor asset coverage, covenant compliance and the maturity or refinancing requirements of the Wells Fargo, SMBC and CLO-I facilities.
Evaluate the sustainability of the $0.43 per-share distribution relative to net investment income, leverage costs and potential valuation losses.
Review the effect of the transition from LIBOR to SOFR on portfolio income, borrowing costs and contractual fallback provisions.
Consider the subordination, cash-trapping and coverage-test risks associated with the 2022 CLO-I securitization.